Capital Gains Deduction for Canadian Business Owners

Running your own canadian company has many tax perks. This includes many write-offs, low corporate tax rates for the Canadian controlled private corporations (“CCPC”), and the income splitting opportunities.

One of the biggest and least discussed tax breaks is the lifetime capital gains deduction that is available when a shareholder of a CCPC is ready to sell his shares of the business or retire. As of today, Canadian Income Tax laws stipulate that this lifetime capital gains deduction amount is $750,000. In simple terms, when a Canadian resident taxpayer is selling his shares of a CCPC, up to $750,000 of the gains on the sale of their shares are tax-free.

But wait, there is more! If some amount of basic tax planning was considered at an earlier point, it is likely that the spouse would have been allocated some shares as well. Since the $750,000 capital gains deduction is available to each taxpayer during his or her lifetime, the spouse would be entitled to another $750,000 in tax-free capital gains. More advanced tax planning would involve a family trust and issuing shares to children as well, to further enhance the capital gains exemption amount for each child.

The point i’m trying to make here is that shareholders of a CCPC have an opportunity to pocket $750,000 of capital gain tax-free during their lifetimes.

In order to qualify for this capital gains deduction, the subject company who’s shares are being sold must meet certain criteria. Some of these criteria must be met at the time at which the shares are sold. Other criteria involve measurements over a two year time period prior to the sale so advance planning is required. The criteria are not onerous. However, professional advice should be sought to ensure that when the shares are ultimately sold, the gains would qualify for the capital gains deduction.

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Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting form the content of this blog post.